Carbon Pricing: Implementation & Challenges (EU ETS/Germany) Regional Dialogue on Carbon Pricing and MRV Santiago de Chile, 22 24 January 2018 Alexander Handke Emissions Trading Division Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety Germany
EU ETS Overview RO DK CZ NL GR LV LUCY MT NO BG IE LTSI IS EE LI SK PT AT HU BE FI Number of installations SE PL GB Germany DE FR IT ES DK SE NO IE LT SI CZ NL FI AT HU BE RO BG SK PT GR PL Emissions EELUCY LV MT LI IS GB FR Germany DE IT ES Current - 2016: Germany: 1,863 installations 453.5 million t CO 2e 0.6 % < 2015 Europe: 11,000 installations 1.75 billion t CO 2e 2.9 % < 2015 Source: EEA, Trends and projections in the EU ETS 2017 UBA/DEHSt, VET Bericht 2016 3
EU ETS Phase I - III overview Gases Initially, the EU ETS focused on CO 2 N 2 O and PFCs were added in phase III. Point of regulation Downstream Sectors Energy: Power and heat generation Industry: Energy-intensive sectors incl. oil refineries, iron and steel, aluminium, metals, cement, lime, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals Aviation Thresholds Energy: > 20 MW total rated thermal input Industry: Varying thresholds for different sectors; Small installations with fewer than 25,000 tons of CO 2 e may be excluded Aviation: 10,000t CO 2 /year - GHGs - CO 2 CH 4 N 2 O HFCs; PFCs SF6 Power Industry Transport Buildings Waste Forestry EU ETS: ca. 11,000 installations & 45 % GHG emissions. 3
EU ETS Phase I - III overview Caps from Phase I to Phase III IPhase III: EU ETS wide cap, decreased by 1.74 % annually (38 Mill t CO 2e ) 4
EU ETS Phase I - III overview 5
Establishing an ETS Organizing Support on all Levels Consultations with Other Ministries involved e. g. in Germany Interministerial Committee for Climate Members of Parliament to ensure support by relevant political parties Stakeholders from covered sectors in Germany Working Group on Emissions Trading (AGE): Permanent stakeholder consultation on all questions of ETS including representatives from companies, trade associations, environmental NGOs, trade unions, parliamentary factions of political parties, federal states and agencies Complemented by high-level consultations with CEOs of major companies in the implementation phase 6
Establishing an ETS Steps to implement the ETS Define key design features What kind of system suits best regarding your national circumstances? Will existing data suffice for your decisions or do you need to collect additional data? How to ensure the ETS will be compatible with systems you envision linking with or beeing part in the future? Legal Basis Establish legal basis needed for the key design elements Institutional Basis Define or create institutions responsible for implementing the ETS 7
Establishing an ETS Key Design Features Coverage Cap Allocation MRV Compliance Registry Flexibility : Sectors / Greenhouse Gases : Achievable Reduction & Required Contribution to national GHG target : Auctioning / Benchmarking / Grandfathering / Carbon Leakage Protection : a tonne must be a tonne : Checks to be carried out / Sanctions and Penalties : Electronic infrastructure to facilitate compliance & trading : Managing supply & demand 8
Establishing an ETS Institutional Capacity Needs Tasks Setting cap and scope Implementing Allocation Monitoring Reporting Verification Approval of Verifiers Surrendering of Allowances Sanctions Relevant Institutions Government Competent Authority (CA): centralized or regional Verifier Operator s report is checked by independent 3 rd party Accreditation Body CA receives allowances and imposes sanctions in case of non-compliance CA approves MP and checks compliance 9
Establishing an ETS Pilot Phase - Learning by Doing Learning is possible only in a real system Hard Framework Clear obligations for covered participant and providing for sanctions to ensure compliance Verified data ensure information basis for subsequent more ambitious trading periods Soft Start Starting with a cap providing for manageable reduction efforts Cost free allocation & Phasing-in Auctioning Additional policies can reconcile economic impacts (e.g. by developing renewable energy, improving energy efficiency, solutions for carbon leakage) 10
EU ETS Achievements ETS infrastructure works well, robust database available, high compliance level EU-wide harmonization from Phase I to Phase III (e.g. EU-wide cap, allocation rules, MRVA, Union registry ) Learned from mistakes (overallocation, windfall profits, criminal actions ) Emissions reductions have been achieved EU: 24,2 % in 2015 compared to 2005 in ETS sector Behavioral changes within companies higher awareness of carbon costs and inclusion in investment decisions Market of emission allowances has matured and performs comparably to other markets of related commodities 11
EU ETS Challenges: Oversupply Accumulated surplus of approx. 1,7 billion allowances in 2016 and decline in CO 2 allowance prices (2008: 25 ; 2016 5 ) Surplus caused by Financial and economic crisis resulted in reduction of output and emissions, which has not been anticipated Considerable proportion of credits from project-based mechanisms Scarcity needs to be restored to give incentives for long-term investments EU ETS can not contribute to the 2050 long-term goal of 80 95 % emission reduction 12
EU ETS Structural Reform Phase III Establishing a Market Stability Reserve (MSR) Start Date: First publication of Allowances in Circulation in 2017: 1.7 billion t CO 2 First transfer of allowances into the MSR in 2019 Backloading 2014-2016: 900 million t CO 2 to be directly transferred to MSR Unallocated Allowances: To be directly transferred to MSR at the end of 3rd trading period Allowances Issued minus Verified Emissions = Allowances in Circulation (Surplus) 13
EU ETS Structural Reform Phase IV 9 November 2017: EU legislative bodies agreed on EU ETS reform for Phase IV to strengthen the ETS again, i.a. Cap reduction by 2.2 % p.a. instead of 1.74 % Doubling MSR intake rate from 12 % to 24 % between 2019 and 2023 to restore scarcity in the early years of Phase IV 2023: Cancellation of allowances in the MSR exceeding the total amount of allowances auctioned in the previous year (approx. 2 billion EUAs will be invalidated) Avoiding Waterbed Effect : Member States phasing out coal are enabled to cancel allowances for the installation that ceased operation 14
EU ETS What comes next? Phase IV reform will strengthen the EU ETS again and will restore its price signal Performance and results of the MSR will be reviewed in Phase IV Further improvements? Cap reduction of 2.2 % p.a. is still not in line with the 2050 longterm goal for a net ghg neutral economy (- 95 %) Better monitoring and alignment of EU ETS and other climate policies 15
Thank you for your attention Alexander Handke Emissions Trading Division Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Alexander.Handke@bmub.bund.de 16